Should my business be a Limited Liability Company?

Valerie Pistole
Legal Matters
Many of my business clients ask me if they should form a Limited Liability Company for their businesses. They want to understand just what an LLC is and how to go about starting and running an LLC. An LLC is a business structure that provides the limited liability of a corporation but has more flexibility than a corporation. Even one person can form an LLC for his or her business, but often a partnership or a group of the business owners decide to start or change the business to an LLC.
Like owners of a corporation, the owners of an LLC are protected from personal liability for business claims and debts. Only the assets of the business itself can be reached to pay for any claims. If the LLC is properly formed and operated, the personal assets of the LLC owners are not at risk if the business is sued or owes money to creditors and the business is unable to pay. In other words, the owners have “limited liability,” assuming that they have not acted unethically or illegally.
You should consider forming an LLC if you are concerned about the personal exposure to business debts or lawsuits against the business. If you have a business that is open to the public and think that your commercial liability insurance might not be sufficient to cover accidents on the premises by your customers, forming an LLC is a good option. Or, you may be considering a long-term lease with numerous financial obligations. Again, an LLC would protect you personally if for some reason your business were unable to fulfill its obligations to the landlord. Only the assets of the business would be available to the creditors of the business. You home and other personal investments would be protected with an LLC as the business entity.
An attorney can prepare the papers to form the LLC or you can do it yourself. You must select a name for the LLC, check to see if someone else has already used the name and if not, reserve the name for your company. Then, you or your attorney file Articles of Organization with the Secretary of State. You can get your LLC established within one or two days if you are in a rush. Once the Secretary of State endorses the LLC, you should prepare an Operating Agreement, which outlines the business arrangement and how the LLC will be run. A written Operating Agreement is not legally required but it is important if you are operating the LLC with other people. A written agreement establishes how you and the other owners will run the business, including how you will divide the profits and losses and accept new owners. Otherwise, if you don’t have your own agreement, California law will dictate how the LLC is operated and what rights and obligations the owners have to each other, which might not be what you had in mind.
(Editor’s note: Legal Matters is a monthly column addressing issues of real estate, land use, business, condemnation, constitutional law and nuisances written by attorneys who work for Walter and Pistole. They welcome questions from Sun readers. Please send inquiries to feedback@sonomasun.com.)